Key Morningstar Metrics for Royal Bank of Canada
- : C$196.00Fair Value Estimate
- : ★★Morningstar Rating
- : WideMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
What We Thought of Royal Bank of Canada’s Earnings
Royal Bank of Canada RY reported strong second-quarter fiscal results. Adjusted earnings per share of C$3.90 grew 25% from the prior-year quarter. This quarter’s results translate into an adjusted return on equity of 17.4%, above its medium-term target of 17.0%-plus.
Why it matters: Royal Bank of Canada continued to deliver broad-based earnings growth, with double-digit year-over-year earnings growth in all its major business segments except insurance. Capital markets segment revenue grew by 19%, better than most of its peers this quarter.
- Looking deeper into the capital markets business, the bank posted an impressive 17% growth in corporate and investment banking and 16% in global markets. RBC’s strong reputation in its investment banking franchise has enabled it to secure exposure to more high-profile deals, including the C$22 billion sale of ARC Resources to Shell.
- While we still hold the belief that capital markets results should not be over-extrapolated, there are no signs of a slowdown in trading activity. RBC’s management team also noted that elevated uncertainty had been a tailwind for trading activities, and that volatility is likely to persist over the next few years.
The bottom line: As we incorporate its latest results, we anticipate increasing our C$196/USD 143 fair value estimates for wide-moat-rated Royal Bank of Canada by around a high-teens percentage and lowering our Uncertainty Rating to Low from Medium. We continue to assess shares as overvalued.
- A reduction in our cost of equity assumption, to 8.2% from 9.0%, reflecting an updated view of RBC’s business mix and cyclicality, is the primary driver of our valuation increase. In addition, we expect to increase our near-term capital markets fee income forecast on the backdrop of strong year-to-date results.
- The Uncertainty Rating change reflects both qualitative and quantitative factors, including a more favorable assessment of RBC’s domestic earnings quality.
